Option Investor
Market Wrap

Too Good To Be True?

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        04-24-2001        High      Low     Volume Advance/Decline
DJIA    10454.30 - 77.90 10636.90 10448.00 1.21 bln   1534/1493	
NASDAQ   2016.60 - 42.70  2095.89  2012.37 1.98 bln   1846/2012
S&P 100   625.74 -  8.15   639.00   625.57   totals   3380/3505
S&P 500  1209.47 - 14.89  1233.54  1208.89           49.1%/50.9%
RUS 2000  462.35 +  1.28   465.07   460.47 
DJ TRANS 2764.64 - 29.49  2795.06  2755.54 
VIX        32.46 +  0.96    32.46    30.47
Put/Call Ratio      0.70

The rate cut rally from last week was simply too strong and rallied too high to be sustainable without some profit taking. Everybody knew it but everyone hoped it would not happen this time. Unfortunately, once weakness appeared the brave bulls from last week turned into timid calves and they ran for the sidelines with tail tucked firmly between their legs.

The bears are not yet back in control but their growling can be heard from the sidelines as warning after warning continues to weigh on the markets. With every earnings miss and negative projection they become a little braver and a little louder. Their memory of being severely burned by the explosion last week has tempered their aggressiveness but they are nibbling away on the weaker stocks.

One of the biggest companies to warn on Tuesday was Compaq with a pledge to cut another 5,000 jobs so they can rebound strongly when the economy recovers. They missed estimates by a penny and said next quarter earnings would only be in the nickel range. CPQ lost over -$3 to $17.56.

Following them for a position on the loss leader board was JDSU with an announcement they were cutting -5,000 jobs as well and sales were going to be -20% less than expected. JDSU has lost almost 30% of its value since Friday. The negative news impacted the fiber and networking sectors which had been flying high last week.

The list of losers was long and broad based with consumer stocks like Kimberly Clark missing estimates by a penny and warning and biotechs like GDT and retailers like COST also warning. There did not appear to be any real pockets of sector safety but there was a few specific stocks bucking the trend. IBM recovered slightly from Monday's drubbing but was trending down at the close. LH and DGX were standouts for the bulls with LH announcing a stock split and DGX being written up favorably in Barrons. Gains in other stocks were slim and scarce.

Amazon announced earnings after the close and there was not any real change since they pre-announced a couple weeks ago. They did give themselves some room to the downside for future revenue by widening the range of guidance. The increased range was mostly increased to the downside.

Lucent also announced earnings that missed expectations again but mostly due to a bankruptcy of one of their major customers. They posted a loss of -.37 when the street was expecting -.23 but without the special items they would have hit that number. They are taking bids for their fiber business which is estimated at over $5 billion and the CEO said they had many big bidders and a closing was expected to happen very soon after the bids finalized. They squashed rumors that they did not have enough cash to get out of trouble and said things were looking much better going forward. Have they said this before?

IBM announced they were buying Informix to better compete with Oracle. Investors cheered the news with a boost for IBM but IFMX dropped almost -30% as analysts felt IBM paid too little for the company.

The earnings news was flying hot and heavy all day and I could write several pages if I listed them all. Relax, I am done. The key points here in my mind are sentiment related and something I mentioned on Sunday. The markets have simply gone too far, too fast. Now the bulls and bears must battle each other for directional control. The top 25 stocks by volume on the Nasdaq were all down but volume was very light at less than two billion. This means there was no conviction. The Nasdaq was up +32% since the April-4th low and we were due for a pullback! The biggest sentiment problem I see is today's closing level. We closed -3 points below where we were when Greenspan cut rates last week. We gave back all of those gains. But before you rush for the phone remember there was almost a +75 point gap open that day on good earnings news. We are still above that gap.

Traders were widely reporting that short sellers were coming back into the market with the most widely shorted stocks taking heat again. The good earnings news is widely assumed to be over. MSFT, IBM, INTC and the other really big caps have already announced and everybody else in our future cannot cause the very big ripples to the upside. They can only add weight on the downside as they continue to warn. With the upside to investor sentiment capped, we need to watch carefully for risk to the downside.

The markets need to work through this period and build a base from which to rally later. Almost nobody expects a retest of the 1619 low from April-4th but there is a good possibility we have more weakness ahead. Consolidation could stop with support in the 1900 range where we spent a week just recently. With each day that passes there will be fewer earnings announcements and fewer chances for that really bad news that could cause us to tank again. We need to be patient and realize that most bad news is already priced in and this dip could be the last buying opportunity at this level. Stocks are still cheap and everyone expects an economic rebound in the second half of the year. Markets discount this expectation and investors will start buying this future once they feel the bottom has passed.

Remember the week after the major earnings in April is historically down and so far we are following the script exactly. The only challenge is waiting and more importantly, recognizing when the bottom has passed. That will be our entry point. Until then, be patient!

Enter passively, exit aggressively!

Jim Brown

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